Risk management Assignment Example | Topics and Well Written Essays - 2250 words

Risk management - Assignment Example These are banks, insurance businesses, mutual funds, securities firms, investment banks and finance companies. A financial institution collects funds from private as well as public investors to use them in financial assets. Financial institutions play the role of mediators in share markets and debt security markets. Financial activities may include bonds, debentures, stocks, loans, risk diversification, insurance, hedging, retirement planning, investment, portfolio management, and many other related functions. Through these functions, funds get transferred to different tiers of economy for positively performing a business function (Babbel & Santomero 1997). When financial companies such as banks and insurance companies sell their products, they cover the risks which could be short-term or long-term risks. There are other companies called â€Å"Reinsurance companies† that sell policies to insurance companies to cover risk factors and save from big losses. Generally, reinsurance companies are big players and can write insurance risks directly. There is another type ‘captive insurance company’ that serves the limited aim of financing the risks of a parent company (Wikipedia 2010). Financial activities are risky business. From management perspective, some financial risks can be such that can be removed by following standard business practices, some risks can be shifted to other participant , and some financial risks must be managed proactively by the institution itself. Financial companies have their own financial risk management systems involving risk management techniques (Babbel & Santomero 1997). Generally, financial institutions, being the principal functionaries, use their own balance sheets to realise a transaction and mitigate the risks involved. Thus, most of the risks are for on-balance-sheet businesses. Financial institutions estimate